Cracks in the China: deteriorating Chinese auto trends & extreme CNY scenarios
* Autos: global SAAR falls 2.1% MoM in July
The July 2015 Global SAAR (seasonally adjusted annual rate) fell -2.1% MoM to 85.4m units, now down -10% from a peak of 94.9m in January. Trends deteriorated MoM in Russia (-6.5%), China (-6.6%), Japan (-7.9%) and France (-11.3%). In Europe the trend was flattish at -0.5%. Due to lacklustre momentum in China, our autos team recently cut their 2015 sales forecast from +7.3% to +4.2% YoY. By region our Global Auto analysts forecast W.EU sales +6.0% YoY in 2015, China sales +4.2% YoY and N. America sales +5.5% YoY. In Euro chems the most exposed to autos are BASF, Umicore and JMAT.
* CNY depreciation: thinking the unthinkable
In recent days Bloomberg reports have suggested that a few Chinese government agencies are penciling in USD/CNY 7.0 and 8.0 for their respective end-2015 and end- 2016 assumptions. Current spot is 6.38. While our house view is that this would be an extreme scenario, our colleagues in FX Research examine what this would mean for other Asian currencies, concluding that the Korean Won and Taiwan Dollar do not seem to be pricing in the risk sufficiently. For European chems, concerns on end-demand go beyond direct sales exposure to China. In a sector where sales growth has been around 2% in the past few years, around 2/3 of this has been fuelled by overall Asia.
* Chemicals IFO benchmark up to 25.7 in August
The IFO chemicals benchmark index (see charts on page 10) improved to 25.7 in August vs. 22.8 in July and +36.7% YoY, significantly above the rolling 12-mth average. The improvement was largely due to an increase in sales expectations (16.7 from +14.8 in July), while the ‘Orders on hand’ index declined further to -7.4 vs -4.9 in July. However ‘expected selling prices in the next three months’ continued to decline to 8 (from +34.4 in July). Last week we flagged risks on volume acceleration in H2 (we model c.0.5% to c.2%, mainly on easier comps) with a correction in oil prices adding to China demand concerns and coming after a quarter in which, on balance, companies overproduced and saw rising inventories and better margins but disappointing cash-flows. US chemical
carloads were up 50 bps YoY last week but are tracking down -0.3% QTD.
* Givaudan: Refining growth strategy, opening up on M&A
Last week we attended Givaudan’s Investor Day where the group presented its new midterm strategy to 2020, with targets to deliver organic growth of 4-5% pa and FCF/sales of 12-17% on average over the next 5 years. M&A was more in focus, with the group seeking opportunities in active cosmetic ingredients and food & beverage integrated
solutions. While we see scope for M&A opportunities, particularly in the fragmented active cosmetic ingredients industry, Givaudan is unlikely to be the only company competing for these types of assets. Note the recent acquisition by US peer IFF of cosmetics ingredients company Lucas Meyer for 7x EV/sales. Givaudan trades on 20.4x 2015 PE, at a discount to Symrise on 22.5x despite its premium FCF yield of 5%. Within Consumer Chemicals, our top pick is Croda. This week we have Umicore’s Capital Markets Day in London on 2nd September.